Alternative Investments Flashcards
Formula to value a property using the direct capitalization method
NOI / r-g
Ratchet
A mechanism that enables the management team to increase its equity allocation depending on the company’s actual performance and the return achieved by the private equity firm
Management Fees
Represents a % of committed capital paid annually to the GP during the lifetime of the fund
Transacation fees
Fees paid to GP in their advisory capacity when they provide investment banking services for a transaction (M&A, IPOs) benefitting the fund
They may be subject to sharing agreements with LP in which case it is typically applied as a deduction in management fees
Carried Interest
Represents the GP’s share of profits gendered by the fund. It is generally around 20% of the funds profits after management fees are applied
Hurdle Rate
Internal rate of return that a private equity fund must achieve before the GP receives any carried interest.
Objective is to align the interests of the GP with the LPs by incentivizing the GP to outperform traditional investment benchmarks.
Key man clause
A certain number of key named executives are expected to play an active role in the management of the fund. In case of departure, GP may be prohibited from making any new investments until a new key executive is appointed
Clawback provision
Requires GP to return capital to LPs in excess of the agreed profit split between GP and LPs.
It is normally due on termination of the fund but may be subjected to annual reconciliation or “true-up”
Distribution waterfall
Mechanism providing an order of distributions to LPs first before the GP receives carried interest
Deal by Deal Distribution waterfall
Mostly employed in the US, allows earlier distribution of carried interest to the GP after each individual deal
Total Return Distribution Waterfall
Mostly employed in Europe and for funds-of-funds, allows for earlier distribution to LPs because carried interest is calculated on the profits of the entire portfolio
Tag-along, drag along rights
Contractual provisions in share purchase agreements that ensure any potential future acquirer of the company may not acquire control without extending an acquisition offer to all shareholders, including the management of the company
No-fault divorce
A GP may be removed without cause, provided that a super majority (>75%) of LPs approve that removal
Removal for “cause”
Clause that allows either a removal of the GP or an earlier termination of the funds for a cause
Causes include:
- Negligence of the GP
- a key person event
- felony conviction of a key mgmt person
- bankruptcy of GP
- material breach of the fund prospectus
Total Return on Commodities Contract
Price return + roll return + collateral return
Where collateral return = RFR x initial collateral required
Contango
Spot price < futures price
Backwardation
Spot price > futures price
Hedonic price index
Transaction-based real estate index which relies on single sale of a property as opposed to repeat sales of the same property
Capitalization Rate
Discount rate - Growth Rate
OR
NOI / Market Value
Debt-to-Service Coverage Ratio
Ratio of first year NOI to the loan payment
NOI / Debt Service
OR
Debt Service = NOI / DSCR
DPI (Distributed to Paid In)
Hint in the name of it
Is the cumulative distributions paid out to LPs as a proportion of the cumulative invested capital
Total Distributions / Total Capital Calls
Presented net of mgmt fees and carried interest
Paid in Capital (PIC)
The ratio of paid in capital to date divided by committed capital
Residual Value to Paid In (RVPI)
Value of LP’s shareholding held with the private equity fund as a proportion of the cumulative invested capital
It is a measure of the PE fund’s unrealized return on investment and is presented net of management fees and carried interest
NAV after distribution / paid in capital.
Total Value to Paid In (TVPI)
Portfolio companies distributed and undistributed value as a proportion of the cumulative invested capital.
This is the sum of DPI and RVPI and is presented net of mgmt fees and carried interest
DPI + RVPI
